Traditionally, financial instruments such as foreign exchange and forward rate agreements were traded through voice brokers. Traders would call their voice broker with a bid or offer and the broker would attempt to find a match with a counterparty. The voice broker would not necessarily reveal the identity of the counterparty at the earliest stage of the deal but would ensure that each of the parties extended to the other sufficient lines of credit for a deal to be completed. Where a trader trades through a given broker frequently, the broker will get to know with what counterparties the trader has a line of credit and, empirically, will filter out bids or offers of which he is aware if he considers that there is little or no likelihood of the trader being able to trade with the counterparty in question.
With the advent of computerised trading systems, the importance of voice brokers has diminished and much of the trades executed, for example on the F/X spot market, are conducted through anonymous trading systems or electronic conversational systems which attempt to mimic the role of the voice broker. However, voice brokers have not been entirely replaced by electronic systems and they still play an important role in the market.
A number of anonymous trading systems have been proposed and introduced into the market. At present, two systems, provided by Reuters Limited of London England and EBS Dealing. Resources, Inc., of New York, N.Y. are prevalent in the foreign exchange spot (F/X spot) trading market. Both of these systems are anonymous in that traders enter bids and offers anonymously and see prices entered into the system by potential counterparties but not the identity of those counterparties. The identities of the parties are only revealed when the deal has been completed. To ensure that deals are not effected between parties which do not have a sufficient line of credit with each other for the deal, a complex credit checking operation is performed before deal completion. If there is insufficient credit the deal is either rejected or only partially completed.
A version of the EBS System is described in U.S. Pat. No. 5,375,055, the disclosure of which is incorporated herein by reference. In this system, credit limits set by the potential parties to transactions are stored at Market Access Nodes to which workstations are connected. An institution will set and store a credit limit for each potential counterparty with which it is prepared to deal. The Market Access Nodes are linked to one or more Market Distributors and one or more Arbitrators. The Market Distributors distribute prices of bids and offers using a pre-authorised matrix derived from the credit limits stored at the Market Access Nodes. The pre-authorisation matrix is used to inhibit trades between incompatible counterparties and to screen bids and offers prior to display so that each trader workstation displays only those bids and offers submitted by counterparties with whom he has credit. Thus, all displayed prices are dealable.
The arbitrators' function is to match bids and offers and to resolve possible contentions in trades which could arise due to the nature of the system.
The Reuters system is exemplified in EP-A-0,399,850, EP-A-0,406,026 and EP-A-0,411,748.
Both the systems identified above have been accepted by the financial markets and have been very successful. However, they suffer from the disadvantage that they are separated from the rest of the institutions' trading operations. Thus, only those institutions which have installed one of the systems can trade using it. Trades are limited to the amount of credit which has been assigned. This credit can not be used for other trades, for example outside the system fur different instruments, even if made with the same counterparty. This restriction can reduce liquidity. The existing systems also have the disadvantage that traders are limited to trading the specific instruments provided for by the systems.